Here’s a somewhat scary statistic for those meant to know about these things. After a six-year bull market, the typical stock in America’s S&P 500 shares index is valued on a multiple of more than 18 times estimated forward earnings. This is not just expensive by historic standards, but super-expensive. In fact, according to analysis by Goldman Sachs, it ranks as in the top 98th percentile of historic valuations since 1976, or in other words one of the highest in nearly 40 years. It scarcely needs saying that these peaks tend to signal the top of the cycle, with some kind of bear market or crash just around the corner.

But hold on a moment, you might say; we’ve barely recovered from the last downturn. It surely cannot already be time for another? Regrettably it can. Most business cycles last little more than seven years, and if anything they tend to be getting even shorter. The US economy contracted in the first quarter and has shown few signs of significant recovery since.

As for the Eurozone, spring has brought a rare burst of growth, but few believe it will last, let alone be strong enough to undo the damage caused by the crisis. Meanwhile, the prospect of Greek default continues to hover over everything like a permanent sword of Damocles, threatening at any moment to plunge much of the advanced world back into financial and economic turmoil.

If economic prospects look so precarious, why are stocks, bonds and other asset prices so high? Part of the answer lies in central bank money printing, or so-called “quantitative easing”. This has now all but ceased in Britain and America, but where the Anglo-Saxon world has left off, Europe, Japan and China has taken over. The world is awash with cheap liquidity.

This in turn is creating new sources of financial instability to replace the old incubators of it in the banking system. History rarely repeats itself exactly, and if looking for clues on what might trigger the next crisis, there is absolutely no point in looking for them in the last one. Banks are no longer a threat to the financial system or the economy. To the contrary, they have become so shrunken by credit loss and neutered by regulation that they have gone the other way, and if called on to help counter renewed turbulence elsewhere in financial markets would no longer be up to the job.

Kindleberger stated that prior to around 1900 a financial crisis appeared around every 10 years for 400 years. The period of 1945-1971 essentially is a financial anomaly, repeated crisis are at the heart of the system. Luckily we have fools who think they can be avoided now in power.

Share on other sites

Central bankers have promised ad nauseum to keep rates low for long periods of time. And they have delivered. Their claim is that this helps the economy recover, but that is just a silly idea.

What it does do is help create the illusion of a recovering economy. But that is mostly achieved by making price discovery impossible, not by increasing productivity or wages or innovation or anything like that. What we have is the financial system posing as the economy. And a vast majority of people falling for that sleight of hand.

Now the central bankers come face to face with Hyman Minsky’s credo that ‘Stability Breeds Instability’. Ultra low rates (ZIRP) are not a natural phenomenon, and that must of necessity mean that they distort economies in ways that are inherently unpredictable. For central bankers, investors, politicians, everyone.

That is the essence of what is being consistently denied, all the time. That is why QE policies, certainly in the theater they’re presently being executed in, will always fail. That is why they should never have been considered to begin with. The entire premise is false.

Ultra low rates are today starting to bite central bankers in the ass. The illusion of control is not the same as control. But Mario and Janet and Haruhiko, like their predecessors before them, are way past even contemplating the limits of their powers. They think pulling levers and and turning switches is enough to make economies do what they want.

Nobody talks anymore about how guys like Bernanke stated when the crisis truly hit that they were entering ‘uncharted territory’. That’s intriguing, if only because they’re way deeper into that territory now than they were back then. Presumably, that may have something to do with the perception that there actually is a recovery ongoing.

Share this post

Link to post

Share on other sites

Kindleberger stated that prior to around 1900 a financial crisis appeared around every 10 years for 400 years. The period of 1945-1971 essentially is a financial anomaly, repeated crisis are at the heart of the system. Luckily we have fools who think they can be avoided now in power.

are you old enough to remember the power cuts,3 day weeks and stacks of fermenting rubbish at the bottom of the path because of the general strikes??..that was the 70's....oh and busby the bird from GPO telephones made you wait 6 months to get a landline installed.

the early 80's brixton riot stuff was just the final blow-off.

about 10 years after we get another small one after the stock market crash/nikkei crash

then about 10 years after that we get another small one after dotcom mania

then another financial crisis 2008-2009(which they haven't learnt from).

we are due (if not in already) a big one.

Edited June 6, 2015 by oracle

Share this post

Link to post

Share on other sites

are you old enough to remember the power cuts,3 day weeks and stacks of fermenting rubbish at the bottom of the path because of the general strikes??..that was the 70's....oh and busby the bird from GPO telephones made you wait 6 months to get a landline installed.

the early 80's brixton riot stuff was just the final blow-off.

about 10 years after we get another small one after the stock market crash/nikkei crash

then about 10 years after that we get another small one after dotcom mania

then another financial crisis 2008-2009(which they haven't learnt from).

we are due (if not in already) a big one.

I was very young. I remember having a cool candle lit monopoly game.

I remember my dad being around a bit more - come 1982 he was around permanently.

All the above, yours and mine, are the end-game of a large, dysfunctional economy, with lots of political interference - I mean, Wedgewood Benn as a ufkcing central planner FFS!!!!! Thick, useless posh tnuc. Babs Castle running industry!!!!!!

We are much wiser now that politicians are not picking winners or running industrail policy.

Share this post

Link to post

Share on other sites

are you old enough to remember the power cuts,3 day weeks and stacks of fermenting rubbish at the bottom of the path because of the general strikes??..that was the 70's....oh and busby the bird from GPO telephones made you wait 6 months to get a landline installed.

the early 80's brixton riot stuff was just the final blow-off.

about 10 years after we get another small one after the stock market crash/nikkei crash

then about 10 years after that we get another small one after dotcom mania

then another financial crisis 2008-2009(which they haven't learnt from).

we are due (if not in already) a big one.

Difference is prior to the 2007/8 one the markets were far freer and were allowed to crash,